Synergy Pharmaceuticals Phase II Success

Recently I took a look at Synergy Pharmaceuticals (NASDAQ:SGYP) an early stage Biotech company. Synergy has two lead drugs under development: Plecanatide (SP-304), a patented drug candidate that targets guanylyl cyclase C (GC-C) receptors in the gastrointenstinal (GI) tract, is being developed to treat GI disorders, including chronic constipation and irritable bowel syndrome with constipation (IBS-C). They are also developing SP-333, a second-generation drug candidate that targets GC-C receptors in the GI tract and is being developed to treat ulcerative colitis.
When looking at biotechs, I have three simple rules that I use to determine if a company is worth considering investing in:
  1. How close they are to actually getting a product sold. Phase II or III companies only are considered and I like to see them through a lot of the Phase II testing;
  2. The type and size of Market. I like to see markets of at least $10B being addressed given they are unlikely to grab a huge market share at first. I also like to see products that address everyday healthcare issues that hopefully work better than current products; and
  3. Current funding, burn rate and ability to raise capital without dilution.
Let’s see how Synergy Pharmaceuticals matches up against the above three rules:
1. They have recently announced successfully completing Phase II trials and start a Phase IIb 28 day trial in December another trial in January 2011.
2. The market is roughly a $27B market and is being developed to treat GI disorders, including chronic constipation and IBS-C. Although not glamorous like some markets this is an opportunity with a new product that will interest larger pharmaceutical companies always looking for that next billion dollar drug.
3. Recent fundings in October has landed them an additional $4M in cash by selling roughly 1.6M shares -- not a lot of dilution given they currently have 90M shares outstanding. They also burn roughly $3-4M/quarter, which means they will continue to use the markets to raise funds. They also just received a $244K federal grant under the Qualifying Therapeutic Discovery Project (QTDP) program to aid the company in its development of Plecanatide. They seem to have access to capital and it probably is only just a matter of time before some larger name financing is done by a firm who will work with them until they get their first product completed or are bought out.
Looking at the above, Synergy passes all three rules. The timing and results of the Phase II trials and how quickly they can get to Phase III trials will drive valuation here. I like the drug concept as Plecanatide is a synthetic analog of a natural peptide hormone called uroguanylin that regulates ion and fluid transport in the GI tract. This seems like a very high likelihood of success if you can mimic a natural occurrence inside the body.
A larger financing by a well respected banking group would be a plus in terms of future exposure to investment funds. Large pharmaceuticals looking to acquire promising new drugs typically like to acquire companies around the time of Phase III trials, especially if the trials have been very successful and the risk of Phase III failure is low. Also of note, Callisto Pharmaceuticals [OTC: CLSP] owns roughly 45 million shares of Synergy and are another early stage development biotech working on cancer drugs. The first is Atiprimod, which is an orally available small molecule drug that displays a number of anti-cancer mechanistic activities. This drug is currently in Phase II development for advanced carcinoid cancer and has potential in several other cancers including liver and colon cancer. Their second drug under development is L-Annamycin, which is in PhaseI/IIa trials for both adults and children with relapsed acute leukemia.

Disclosure: Long CLSP.OB